Debt problems don’t always happen overnight. Yes, financial trouble can occur quickly and unexpectedly. A job loss or a vehicle breakdown could result in a sudden increase in how much debt you’re carrying. But, for many people, debt gradually spirals out of control over time.
You might not realize it’s happening until your debt becomes unmanageable. Here are five common signs that you may be experiencing debt problems, and steps you can take to help solve the problems and become debt-free.
Are you regularly carrying a balance on any of your credit cards, and making minimum payments only? If so, you might be headed for trouble. Many people think that making a minimum payment is all they need to do to meet their obligations, but there are several problems with
Paying just the minimum amount each month means it will take much longer to pay off your credit card balance. Even a relatively modest amount of debt, such as $300, can take you over 40 months to repay. You’ll also be paying more interest on your debt, so that $300 in purchases ends up costing you a lot more.
If it’s a matter of affordability (i.e. you can only afford to make the minimum payment each month), you likely have too much debt. With so little wiggle room in your budget, a sudden increase in expenses or a drop in income could result in serious debt problems.
Also, the longer you continue to make just the minimum payment, the more likely your credit score will be negatively affected. In most cases, minimum payments will make little dent in the principal amount owing. Potential lenders may view your payment history as an indication that you have a cash flow problem, such as too many expenses or too much debt. If it appears like you can’t repay your current debts, a lender will be less likely to approve a new credit or loan application.
What to do:
If you are regularly making minimum payments on your credit cards, this credit card payment calculator shows you how long it will take to pay off your debt and how much interest you’ll pay when you make only minimum payments. The results can be shock. Credit cards typically have very high interest rates and that can cost you a lot over a long period of time.
You might find that you can redirect more money each month to your credit card payments. Set up a budget that includes every monthly cost, and use auto-payments or set reminders and alarms (on your phone or in a budgeting app) to ensure you make your credit card payment a priority.
Consider talking with a Licensed Insolvency Trustee (LIT). You might need help determining how to tackle credit card debt that never seems to go away.
If you have missed multiple payments on a credit card, loan or line of credit, you may get calls from a debt collection agency, a company that recovers unpaid debts. There are specific steps you should take when you’re contacted by a debt collection agency. Sometimes these calls can become confusing and intimidating, and it’s tempting to try to avoid the situation altogether. However, doing nothing can increase the gravity of your situation.
What to do:
Start by thoroughly reviewing your finances to determine if you can repay your debt by adjusting your spending and savings. If you have never dealt with a collection agency, it’s important to understand your rights and obligations. The Government of Canada website is a good resource when you want to know more about dealing with a debt collector.
An LIT can explain what’s being asked of you, and help you understand your options to handle your debt and any collection demands. If you’re unable to repay all of your debt, you may want to consider a consumer proposal, which is a form of debt forgiveness. If that’s the case, an LIT will communicate directly with your creditors to negotiate an agreement to settle your debts. The filing of a consumer proposal will stop collection calls, which can remove a lot of stress from your life.
If you’ve applied for loans and you aren’t getting approved, that’s a clear sign of financial problems. If a lender offers you a loan, but the terms seem poor (like a very high interest rate, for example), that’s also a sign that you aren’t considered a good risk, and your credit isn’t good.
It doesn’t take much to impact your credit rating and score. Late bill and debt payments can negatively affect your credit rating, and ongoing payment problems will continue that trend. Your payment habits, credit history, amount of debt and credit utilization are just a few things that will impact your score.
What to do:
Check your credit report regularly, making note of any credit behaviour that has impacted your credit score negatively. You can request a free print copy of your credit report once a year from TransUnion and Equifax, the two major credit bureaus in Canada.
Focus on your repayment habits to rebuild your credit. Make your payments on time and try to make more than minimum payments. Once your debt is eliminated, build a history of good payment behaviour by making very small purchases with your card or credit line and repaying them in full immediately.
Do you need to borrow money to make ends meet? Are you borrowing money to pay off other debts, like credit card debt or car loan debt? That suggests you’re in financial trouble. A cash advance on your credit card or a quick online loan from an alternate lender may seem like a good solution in the moment, but they can quickly spiral out of control.
Payday loans may be the riskiest form of a cash advance loan. They typically have a very short term (often you have to repay it within a few weeks), and the interest rate can be extremely high, which can make it difficult or impossible to repay. Payday loan obligations can quickly take over your budget, meaning you’ll have less money for everyday expenses and other debts. That can cause a debt trap, with existing debts increasing as you borrow more to keep up.
What to do:
Talk to your creditors, your landlord or your lenders. If you’re having trouble paying your bills, your creditors may extend a due date so you have some breathing space. Your bank might offer you a line of credit with a much more reasonable interest rate than a payday loan or credit card. Your landlord might be willing to offer you a grace period for a few months.
If you aren’t sure how to manage your monthly finances to pay down your debts without taking on more debt, seek the advice of a debt professional. An LIT can advise you on budget and credit management strategies and explain available debt relief options.
Are you feeling the impacts of debt physically or emotionally? Debt can take a serious toll on your health. Depression, worry and anxiety, sleep disturbances, irritability, and even suicide rates have been known to increase when people have debt problems.
Have you been avoiding your bills or missing payment dates? Are you and your partner experiencing more conflict because of money problems? Avoiding or denying your debt because it causes you stress can lead to collections calls, poor credit and even more emotional stress.
What to do:
Have you heard the phrase, “the best disinfectant is sunlight” before? It’s true for debt stress. The best thing you can do to make yourself feel better emotionally (and physically) is to shine a light on your financial situation. Lay out all your bills, list all your expenses, debts and income.
Can you reduce some expenses? There may be expenses you can cut entirely for a period of time to give you more money to put towards your debt (think cutting cable, reducing your cell plan or putting off home upgrades). If you’re still feeling debt stress after making some cuts, look at ways to eliminate your debt more quickly. A debt consolidation loan might be an option, or you could reach out to your creditors and ask for an extension. And if you feel like stress is overwhelming and your mental health is being impacted, talk to a Licensed Insolvency Trustee. No debt problem is too big to tackle.
Debt can be uncomfortable, but there are solutions. If these five warning signs sound familiar, consider if any of the solutions can help you. You don’t have to be overwhelmed by debt problems.
Getting out of debt is possible. Meet with a Licensed Insolvency Trustee to resolve your financial problems.